On the first tab:
– Select your AS/400 in the “System” drop down list.
– Give a name to your DSN in the “Data source name” field
– If you want to specify connection option (User profile, Signon dialog prompting) press the “Connection Option button to specify information.

On the second tab:
– Specify the SQL default library. This library will be your targetted library (for example if you create table in your SQL instruction without specifying a library)
– In the library list field, specify all libraries that you want to access seperated by a space.

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Is there any need to install odbc driver in i5/OS machine.
That depends on what remote database you want to connect to. Most nowadays make Type 4 JDBC drivers available that get around the need for ODBC drivers. (A Type 4 driver is written in Java itself, so it only relies upon a compliant JVM.)
But various capabilities still indeed require a "driver", although they generally wouldn't be "ODBC" since that's technically a Microsoft implementation of an Open DRDA subset. Such drivers must be obtained from the vendor of the remote database, and generally they are pretty pricey. For some cases, 3rd-party suppliers may have less costly solutions; e.g., their replacement "driver" lets your RPG think it's talking to a remote database even though the 3rd-party driver is converting the conversation to and from an internal Type 4 JDBC driver or some other redirection.
Tom

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